Watching 'Rango:' Paramount's deal with DreamWorks Animation

One little lizard could make a huge impact on negotiations between Paramount and DreamWorks Animation. That lizard is 'Rango,' the Johnny Depp-voiced character featured in Paramount's first-ever digital animated feature, which opens at nearly 4,000 theaters today. The film cost a reported $135 million and is expected to bring in between $40 million and $50 million at the box office this weekend, the biggest opening of the year so far. That all sounds good and simple, but this is a complex story.

'Rango' is a shot across the bow at DreamWorks Animation . Paramount is for the first time putting itself into competition with one of its premiere partners. DreamWorks Animation struck a deal back in 2006 to pay Paramount an 8 percent cut of its revenues to distribute and market all its films. That deal expires at the end of 2012, but negotiations will start long, long before then.

So why's Paramount getting into the digital animation business? Simple, because it's booming: five of the top 10 films in North America last year were animated, and these films tend to perform very well overseas.

Now as Paramount and DreamWorks Animation negotiate their new deal, 'Rango's' performance will play a starring role.

CEO Jeffrey Katzenberg wants to negotiate paying DreamWorks Animation a smaller fee—just six percent instead of eight percent, and could threaten taking his films to another studio. But the better Rango performs, the more negotiating power Paramount has in striking a new deal with DreamWorks. As Caris & Company analyst David Miller points out, Paramount can tell DreamWorks animation that they have the digital animation power to go it alone. But DreamWorks animation could also spin a 'Rango' success in its favor—saying this proves digital animation is hot.

Paramount would like to keep its DreamWorks Animation deal, while continuing to produce its own animated films. Distributing DreamWorks Animation movies provides tens of millions of dollars in revenue per film, with absolutely zero risk.